I need advice on the correct tax procedure when mineral rights are sold. I received a 1099-MISC for the total proceeds from the sale. I thought this was under capital gains and the cost basis for the rights were to be considered. Any thoughts?
If you have documentation of the cost basis value when you received the minerals, then you can try to protest. Otherwise, with no documention, the IRS assumes a cost basis of zero and you get the whole capital gains tax. The one who sold it to you has no idea of what your basis is, so they report the whole amount.
I am not a tax accountant, but that is my understanding.
Anybody else out there have comments?
Thank you for the quick response. In your answer you reference capital gains tax. Is that normally reported on 1099-MISC?
If you inherited the minerals, you have a step up cost basis at the time you inherited. Meaning, the value of the minerals are valued on the date of inheritance and you would use that amount as your cost basis for the sale.
How would one know the step up cost basis from Aug 1982? I did not find out I had mineral rights until Jan 2011.
The valuation is done on whether the minerals were producing or non-producing at that time. If leased, then perhaps the lease amount per acre. If producing, then a formula might be used of four times the annual oil production and seven times the annual gas production. If non-producing and not leased, then about $1/ac is the customary if not $0. It all depends upon the geology of that particular tract. Could be a step up or a step down depending upon the area.
If held in an LLC or a trust, then a whole different scenario exists. Talk to your accountant about it.
Your CPA should be able to help you assess the tax issues. Producing minerals will be valued higher than non-producing. Often non-producing minerals are valued at zero on the date of inheritance. But, if there was production a valuation of the minerals should have been completed at the time of the Federal and State estate tax process and that value can be used to determine cost basis.
Sometimes, if the estate is small and didn't necessitate a formal appraisal you might be able to use 3 to 5 years of monthly average production revenue for cost basis. And, you might be able to get a deduction if you can show a taxable basis on the estate tax return. There is a lot to examine and consider, so it's best to get a CPA familiar with oil and gas tax laws.